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Loans for First-Time Buyers

For years, FHA mortgages have been the popular choice for first-time homebuyers because of the low mortgage rates and lenient approval standards, but the USDA Rural Development mortgage may be overlooked as the better choice.

First-time homebuyers are often most concerned with the affordability of their mortgage. Many are just starting their families or just entering the workforce and don’t have much savings to offer toward a home purchase. Most of them don’t have many assets like retirement funds and stocks to make their mortgage application more appealing. FHA is more accepting than other conventional loans than require more money down with the minimum accepted credit score lower than these competing mortgage programs. But since it isn’t as well-known, buyers may not realize that the Rural Development loan’s requirements are even looser than FHA and the payments are often more affordable.

FHA’s minimum accepted credit score is 640, which is generous considering the average credit score is in the mid-to-upper 600s. However, USDA’s Rural Development loan accepts applicants with credit scores as low as 620. First-time homebuyers might have bruised credit which has hindered them from being approved for a home loan in the past, or maybe they have limited credit. For USDA, these aren’t huge hurdles. Many past credit mishaps like collection accounts, late payments, and bankruptcies aren’t immediately disqualifying. USDA will also consider alternate lines of credit for applicants who don’t have sufficient trade lines reporting. All-in-all, the Rural Development loan is the most lenient in regards to credit standards.

The required down payment for FHA loans is 3.5%. This is low in comparison to traditional down payments of 5% or more, which is why FHA has been a popular alternative for so many years. For first-time homebuyers who are shopping for affordability, the USDA zero-down payment Rural Development mortgage is unbeatable. Not only is no down payment required of the buyer, mortgage rates are below-market, even beating FHA’s low rates. This is possible because the Rural Development is backed by the USDA which protects lenders against losses. With less risk come lower mortgage rates.

Since FHA and USDA are both low-cost mortgages with less than 20% down, they require mortgage insurance. This is the case for all loans with less than 20% down, except VA loans which are veterans-exclusive. Mortgage insurance rates for both FHA and USDA are affordable, but USDA beats FHA by almost a point. Where FHA’s mortgage insurance consists of a 1.75% upfront fee and .85% annual fee, Rural Development guarantee fees are 1.00% upfront and 35% annually. What’s even better is the upfront guarantee fee is rolled in with the total mortgage so no money is actually due upfront. With the low mortgage rates and mortgage insurance, Rural Development mortgage payments can be lower than FHA, even despite paying nothing down.

Although both FHA and USDA Rural Development are solid choices for first-time homebuyers who are looking for convenience and affordability, lenient approval standards, low mortgage rates, and cheap mortgage insurance clearly make USDA an option to consider.